As Theresa May’s Lancaster House speech made clear that the UK will leave the single market, it is likely that the “passporting” that allows London-based financial firms to service clients across the continent will be lost. It is clear that the investment banks providing underwriting, trading and derivatives services might have to diversify operations to cities such as Frankfurt, Paris and Dublin. What is less obvious is that the underlying providers of funds — pension and insurance funds, sovereign wealth funds and private asset managers — may also end up leaving for Amsterdam or Luxembourg. All these cities, and others, are hard at work trying to lure different segments of the market.
Can capital markets union be salvaged? A unified European capital market requires a unifier. The new single capital markets regulator, which would sit atop national regulators, would be responsible for overseeing the development of capital markets. Its job would be to ensure that the EU’s Markets in Financial Instruments Directive — which provides harmonised regulation for investment services — is consistently applied across the EU for all capital market activities. Finally, there is no reason why the UK could not work closely with or even join the common capital market regulatory body, perhaps negotiated as part of the kind of free-trade arrangement for financial services that Mrs May alluded to in her Lancaster House speech.
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